Should executive salaries be capped?

Most European countries have a minimum wage, but what about a “maximum wage”? Should there be a limit on how much companies can pay their employees? Should the highest-paid executives have some sort of cap on their salaries? In fact, some European countries do already place a cap on what public sector employees can earn. Would it be possible to apply something similar to the private sector? Or is the idea itself completely bonkers?

What do our readers think? We had a comment from Christos, who thinks that executives are paid too much right now, not just in absolute terms but also relatively compared to the average salary their workers earn. Is he right?

To get a response, we spoke to Luke Hildyard, Executive Director at the High Pay Centre, a think tank that researches pay at the top of the income distribution. What would he say?

Yes, I think we would agree with that. In the UK – and the trend there mirrors what’s happened in most other advanced economies – a typical FTSE 100 CEO has gone from being paid about 60 or 70 times their average worker’s salary in the late 1990s to closer to 150 times today. There hasn’t really been any corresponding improvement in the performance of executives; there’s not reason to think they’ve become individually more brilliant in relation to their workers over that period. It just seems that they’ve been able to exploit their position of power at the top of companies, and corporate culture has become more tolerant of the pay of those at the top racing away from everyone else. And, of course, the consequence of that is that it leads to much weaker trust in business, a lack of social cohesion, and an increasingly angry and mistrustful society.

This brings us to the comment from Pedro, who argues that wages should be bounded between a minimum and maximum wage, with salaries distributed according to job performance. It seems like a radical policy, but does it make economic sense? And would it be good for society?

To get a response, we put Pedro’s idea to Kevin J. Murphy, Professor at the University of Southern California; Kenneth L. Trefftzs Chair in Finance at the USC Marshall School of Business; Professor of Law at the USC Gould School of Law; Professor of Economics at USC’s College of Letters, Arts & Science. How would he respond to Pedro?

There is a perception – long-held in Europe but growing in the U.S. — that income inequality is a pressing problem calling for government intervention. The importance of, and the solutions to, this perceived ‘problem’ is hotly debated, with some of the debate asking the sensible question of the causes and consequences of inequality. In the U.S. for example, there has traditionally been a tolerance for inequality driven by differences in skills, abilities, ideas, innovation, and entrepreneurship, but an intolerance for inequality created by corruption or power (including the power of monopolies in a non-competitive marketplace). Indeed, Adam Smith taught us that societal wealth is maximised in a corruption-free environment where individuals are free to consume and produce at prices (including the price of labour) determined in a competitive marketplace.

The problem, of course, is that maximising societal wealth rarely allocates that wealth in equal shares across the members of that society. Redistributing that wealth to facilitate more-equal shares inevitably reduces the size of the overall pie to be sliced, and the trick becomes in dividing the pie more evenly while minimising the residual loss.

Setting minimum and maximum wages are a particularly inefficient method of redistributing wealth, since it explicitly taxes individuals with skills, abilities, ideas, innovation, and entrepreneurship. Binding minimum wages hurt society because it creates a class of unemployed individuals who would be eager to work for market-determined wages, but cannot find jobs at the higher minimum wage. Their plight will predictably increase over time, as employers respond by shifting from labour-intensive production technologies to capital-intensive technologies.

Setting maximum wages creates a potentially worse set of problems, which I’ll address in my response below to Bernard.

To get another perspective, we put the same comment to Luke Hildyard from the High Pay Centre. How would he respond?

It’s an interesting proposition, and it anybody suggests it – policymakers, think tanks or campaigners – it’s derided as being unrealistic or extreme. But, if you think about it, what’s really more extreme? The idea of one individual being paid many hundreds of times what an ordinary worker earns, or the idea that their pay should be capped at a mere 20 times? Or 10 times? 10 times the average workers is still a very decent amount of money. It affords a lifestyle far beyond what most people could even dream of. So, it’s not such a crazy proposal, but I think it’s very unlikely that we’ll see any policymakers introduce it anytime soon. I’m not aware of it being given serious consideration in any major economy.

The government could apply a cap in the public sector, it can also use public procurement to drive down pay in the private sector. A great many of these firms benefit from public spending, so you can say: ‘Right, we’re not going to award any more contracts to people unless they distribute their pay throughout their organisation a bit more fairly and proportionately.’ So, that might be a good way of moving towards that without going all the way to a full cap.

Next up, we had a comment from Bernard, who dislikes the idea of a maximum wage, claiming it would be particularly detrimental for entrepreneurs. Is he correct? Would a wage cap deter entrepreneurship and innovation?

How would Professor Kevin J. Murphy respond to Bernard’s comment?

Bernard is absolutely right. Setting maximum wages destroys incentives to work past that maximum wage. In situations where wages are variable (for example, in sales), setting maximum wages creates incentives to shift performance unproductively across periods (for example, by saving some of this year’s production to next year when the cap might be binding).

The worse problem is the ‘brain drain.’ Unless maximum wages are set globally (or even locally across all activities), the cap will not necessarily stifle innovation but rather determine where that innovation occurs. Top athletes and entertainers, more example, have routinely flocked to the U.S. where there are less constraints or implied maximum wages. Top U.S. corporations, saddled with uncompetitively high corporate tax rates, have flocked to Ireland, the Cayman Islands, and other tax havens. Setting implicit caps on European investment bankers have driven a move in top financial entrepreneurs into hedge funds, private equity, or less-constrained overseas markets such as Wall Street, Hong Kong, or Singapore.

Finally, how would Luke Hildyard respond to the same comment? Did he agree that setting a maximum wage across Europe would lead to ‘brain drain’, as the most talented individuals go elsewhere, attracted by more competitive compensation?

Well, I think the risk of both losing so-called ‘talent’ overseas is exaggerated, and hypothetically if it did happen, would it be so dreadful? If you look at what makes companies successful, in some cases there are examples of particularly driven individuals pushing them forward and coming up with inventions and innovations on which the company’s success is built. But I think that in those cases, even, they’re not especially motivated by pay or making loads of money, but by status and responsibility and prestige and the significance of achieving something big. More generally, if you look at the chief executives of the world’s biggest companies, they tend not to be poached from international rivals, they’re much more commonly promoted from within. If you look at those companies, very many of them have got long, established histories, they’ve got thousands of workers, in many cases they depend very much on support either in public spending, investment in research, lobbying on their behalf by different governments. It’s very contestable to argue that their success is entirely based on one individual, or a handful of individuals at the top. I take a much more collective view of success, that it depends on the wider economic context, a healthy public infrastructure in terms of education, transport, energy and whatnot that we have in the west, and most of all on the contribution of all the workers that make up the company staff, rather than just the one or two at the top.

Should executive salaries be capped? We have a minimum wage, so why shouldn’t we have a “maximum wage”? Let us know your thoughts and comments in the form below and we’ll take them to policymakers and experts for their reactions!

Should executive salaries be capped?

Tough one. Minimum wage was a good idea, until it transformed into ‘The Wage’ agreed to with the unions. It’s not. It’s a minimum wage. Sure. Eye watering and obscene executive pay is a problem, until you realize that it will do nothing to increase low wages. But it might increase some low exec wages.

History shows that capping wages means you end up with second rate people making bad decision that wreaks profitability and results in job loses. Not a good idea.

JuliaOctober 1st, 2018

People are so desperate for jobs now the population has grown so much that there will always be an abundant supply of hard working capable people willing to fill a job position.

IvanOctober 1st, 2018

Julia That’s correct and employers will ‘always’ pick the best unemployed person for the job & pay that person more to keep them which is inequality via ability, like I said before inequality is built in to nature and trying to erase is it dangerous beyond belief. We really are not all the same so why would you run your society claiming we are ?

JuliaOctober 1st, 2018

That is not quite how it works. When I worked in London, the employer would pick the best person for the job. The original pay packet may be slightly higher than the average or the same. Then, knowing full well that there is an abundant supply of capable workers hungry to fill your position you have to work after hours for free to prove you are worthy for a pay rise or small promotion. If you get a small pay rise you have to stay after work and work for free again. Only the employer, execs and ceo’s win. They need to be regulated by a cap so it is not so disproportionate.

IvanOctober 1st, 2018

Julia It is exactly how it works when you have high unemployment as in Southern Europe and employing execs and ceo’s works on exactly the same principle as it does for workers, except if they do their job badly everyone in the business suffers. In low employment you have to pay more simply because if you don’t your competitors will & you will lose your best staff.

JuliaOctober 1st, 2018

I will repeat my original point, they will not do their jobs badly as someone is itching to fill their job position. Win win-for shareholders.

LuigiOctober 1st, 2018

No need to cap; just tax and stopgap all loopholes, etc. You can earn more money, but we think 5, 10, 50 million dollars a year is more than enough, eh? (Whatever the sum may be…)

It depends on what type of society we want to build. A free capitalist one, or a regulated social democracy. I favour the capitalist one where private entities are allowed to fail without bail-out from the government. In that case, any regulation on wages is wrong.

Cap it by 100million aka 100000000. Nobody needs more than that, and give everything above that to the workers at the middle level of the company and below. So in practice a ceo can get 1billion on paper but in reality everything above 100million will go to the workers below. Afterall if a company believes it can spare so much money to pay1indvidual that isn’t even doing that much work compared to other people then we shouldn’t stop the company from paying it out but rather redirect the payment to the other workers that helped make that possible. If we simply say don’t pay this money then it will remain in some company bank account in some far away UK territory hiding behind layers of a trust etc. and not benefiting the workers. If you share 100million amongst 100thousand workers each would get 1000, 10000 workers could each get 10000 and so on and so forth. Maybe 10000will not make a big difference for a high level manager who makes millions but for a ordinary worker 10grand will be life changing. And if it is shared among less workers the money per worker increases.

Yes. An executive’s salary should not be more than ten times the average worker’s wage. He or she may be at the top of the tree, but every worker is a cog in the machine and a well oiled machine needs every cog to work well.

The right wage is what allows a dignified life. It doesn’t matter if there are rich people, there must be no poor people. Poverty is that which does not allow the development of human person. Per ART 3 of the Italian Constitution “…… it is the task of the republic to remove economic and social obstacles, which, by limiting the freedom and equality of citizens, prevent the full development of the human person and the effective participation of all workers in the political, economic and social organisation of the country.”

Neither by intervention of the political EU nor by its Member states! It is not an EU competence. More State income- through taxation (if not evaded)- goes into the State coffers- benefiting all (if not plundered).

One should also discuss if certain State owned (national) enterprises are justified to have a rightful space & place to function as protectors for our basic & guaranteed HR values “at cost”- without a profit motive.

Cost capping- in such instant- which includes all State bureaucracy & the political hierarchy’s earnings- should be the concern of all voters (“political shareholders”). Not so?

Why do governments’ believe staunchly in the advice of “neo liberals”, the World Bank & IMF globalists etc.- who encourage selling off public enterprises- who were guardians of our basic “Human rights”- like free access to water etc? Was it a misunderstanding or to hide an opportune but unsavory agenda?

Issues about executive remunerations concerning private enterprises will at best remain an emotional subject & attempts to regulate will be futile. To overestimate values & capacities of certain humans, their ego & “super human?” achievements is (an unfortunate) part of our adopted economic system & should self regulate itself.

Private shareholders & CEO’s decency & ethics- not greed- would be the best regulators.
Most create value, growth & jobs & even entertain us………..https://www.bbc.com/news/entertainment-arts-40248415
In contrast to our overblown & over important regulators who are value consumers!

No. Who are we to establish what someone should get as a maximum wage in the private sector? This is such a socialist/communist ideology; where there is no free enterprise, the government even controls the wages of those that create and lead companies. If the EU wants to control wages then start in their own house (government & public sector) and leave the private sector alone.
I wish the ideology of socialism would just vanish from EU leaders and we should just follow a free enterprise and free market path – This is what create jobs, wealth and prosperity.

Opposing socialist values means lacking empathy.
If you think you deserve those kinds of salaries with all the people starving and being psychologically oppressed by the lack of opportunities in today’s job market, you’re a pig that has no idea of what it means to live in a society.

Let’s start with EU/EC/EP officials and staff, down to politicians and public administrations. Then and only then, let’s look at the private sector. As a whole, caps like this in the public sector can ensure better balanced payments for crucial jobs in education, healthcare, police and fire brigades, etc. People who proof today to be indispensable and are well underpaid.

I really don’t get the purpose of this page. To debate real issues or to make questions that a) no-one cares about b) are way too obvious to even answer c) no matter what one answer nothing can be done. I mean come on capp executives pay? How are you supposed to do that? Are you serious? Come on! I think we do have a Lot of real issues in Europa right now that do need debate!

Hi Fer Nandinho, don’t you think capping executive salaries is relevant at a time when so many people are being made unemployed or struggling to make ends meet due to coronavirus?

FernandinhoApril 20th, 2020

I believe that this question is completely irrelevant as pretending to cap salaries on private sector would be an interventionism that would be more appropiatte of a communist state not for a European one. Those earning more should contribute more. That’s is a as far a this can go. Putting a cap is just not feasible!

Debating EuropeApril 20th, 2020

Thanks for your feedback. You just argued your point, which, in answer to your initial question, is the whole point of this page. Keep debating!

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